Observers have often said that U.S. carriers, well known for maintaining strict control of their hardware and pricing, would be unwilling to support payments chips in their phones without a cut of the transaction revenue. But bankers are reluctant to share these fees, and the India test offers a viable alternative: subsidizing the cost of the phone.
Though Citi executives stressed that paying for phones is not part of their long-term strategy, analysts said the idea could give mobile payments enough of a short-term boost for the technology to gain critical mass among consumers. Citi has taken a similar approach in the past to persuade consumers to adopt new technology.
In its test in Bangalore last year, Citi offered participants up to $110 to purchase a Nokia Corp. handset and use it to make purchases.
Beyond the rebate, "there was no unusual dividing up" of the transaction revenue or any other expenses, said Jeff Semenchuk, a managing director and the head of Citi growth ventures. "Everyone stuck to their core business, and how they make money."
The phone featured near-field-communication chips that enabled people to make contactless payments with the handset. Customers needed to link a Citi card to the phone and make 12 purchases to receive the full $110 in rebates. Most did — and kept on going.
Satish Menon, the executive vice president of Citi growth ventures, said there were two categories of trial participants: the active ones, who sought it out, and passive ones, who had to be approached.
The active ones increased their spending on their linked Citi accounts by 300% over the course of the trial. Even the passive participants spent 75% to 100% more, he said. (A control group of nonparticipants kept their spending flat.)
The project also delivered benefit to the other major players, Nokia and Vodafone Group PLC, which provided the wireless service for the phones. Menon said that Vodafone saw measurable improvements in customer loyalty among participants. (To simplify the enrollment process, the trial was restricted to existing customers of Citi and Vodafone, so it could not measure new business for either company.)
MasterCard Inc., the contactless payment terminal maker Vivotech Inc. and 250 Bangalore merchants were also involved in the test, which ran for 26 weeks starting in July.
Menon said the project showed that the business case for mobile payments, for both banks and wireless carriers, "has been completely proven with the Bangalore piece, and I think that bit of information is universal and will apply both in the United States and in the other markets."
In Bangalore, the $110 rebate made the phone free to consumers, and was so popular that 20% of all the new handsets Nokia sold in the city were purchased through the program, Menon said.
George Tubin, a senior research director at TowerGroup Inc. of Needham, Mass., said Citi has a proven history of using incentives to drive consumer behavior.
The Bangalore rebate echoes a well-known 2004 promotion in which Citi offered Apple Inc.'s hard-to-find iPod Mini music player to customers who agreed to open a Citi account online and use its bill-pay service. At the time, it was arguably easier to get an iPod through Citi than to find one in stores.
"Citi would say, 'We'll give you a free iPod, but you have to … do more than two bill payments a month,' knowing that when customers do more than two bill payments a month, they become more loyal customers, they carry higher balances," Tubin said. Citi was "trying to force the behavior that they know a more profitable customer exhibits."
